Kentucky Steps Up When Patents Step Out for Insurance Innovation

Insurance is a highly regulated field. New approaches to innovation are sorely needed. The need for innovation itself is undeniable as the tech world runs head long into the world of insurance. For example, the regulation of insurance is hundreds of years in the making and steeped in arcane regulation. However, the patent system—ostensibly an engine of innovation—has been notably hostile to insurance innovations, especially since the Supreme Court’s 2014 decision in Alice Corp. Pty Ltd. v. CLS Bank Intern. Indeed, the USPTO’s latest guidance on applying Alice specifically lists insurance as a type of fundamental economic practice that should be treated as unpatentable.

A Local Lifeline for Insurance Innovation

While the federal patent system may be restricting the protection available for insurance innovations, there are other ways of supporting innovation, and Kentucky is leading the way with its recently passed regulatory sandbox for insurance innovation (KRS 304.3-700 to KRS 304.3-735). Kentucky, like all states, has passed various laws and regulations to protect consumers and insurers. Traditionally, these types of laws and regulations are very detailed and prescriptive to try and minimize risk. However, this framework often stands in the way of innovations that would benefit those same consumers and insurers. Kentucky’s new regulatory sandbox:

• gives the insurance innovator the opportunity to submit an innovation for testing with the assistance of regulatory counsel to outline of areas of regulation that may be an impediment; and then
• (ii) provides the insurance regulator a mechanism to temporarily suspend laws and regulations that stand in the way of promising innovations to allow the innovation to be tested for its effectiveness and value. In this way, insurance innovators can test their innovations with safeguards tailored to the innovation to protect against harm to consumers so that the Kentucky Department of Insurance (KDOI) and develop updates/revisions to the regulatory structure as necessary.

The regulatory sandbox went into effect on June 27, 2019 and follows a pattern that will seem broadly familiar to many patent practitioners. Initially, an applicant would submit an application that includes a detailed description of the innovation. The application would then be reviewed and either approved or rejected, with a rejection being provided by way of a notice describing the specific defects in the application. If the application was accepted, the KDOI would issue a limited no-action letter creating a safe harbor for the applicant—and only the applicant—that sets forth the terms and conditions governing a one- to two-year beta test. Once the beta test is completed, and the KDOI has reviewed the innovation’s utility, it may then issue an extended no-action letter enabling other entities to utilize the innovation for a period not to exceed an additional three years. As part of this process, the KDOI commissioner would determine if the innovation is “not substantially similar” to an innovation that had previously been beta tested or proposed in another sandbox application. The sandbox law also recognizes the proprietary nature of insurance innovation and specifically exempts information that relates to the financial condition of an applicant from the Kentucky Open Records Act.

Not a Patent, But Maybe the Next Best Thing

Of course, the Kentucky insurance regulatory sandbox cannot simply be treated as a state law analog to the federal patent system. For example, an application to be admitted to the regulatory sandbox requires significant insurance-specific information that isn’t required for an application to obtain a federal patent. Similarly, there are restrictions on who can apply to be admitted to the regulatory sandbox, such as that it is necessary for an applicant to the regulatory sandbox or an affiliated insurer to hold a valid certificate of authority if the innovation involves the issuance of an insurance policy. However, despite the differences, the regulatory sandbox could prove a welcome support for insurance innovators seeking to avoid the headwinds they would face seeking a patent.

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